Office of Regulations and Interpretations
Page 14

retirees cannot afford to wait any longer, as their retirement savings are being depleted by
conflicts of interest every day.

B. From the standpoint of the rulemaking process, the DOL has surpassed _all
applicable requirements, and industry calls for a re-proposal of the rule are
meritless.

The DOL has followed what can only be described as an extraordinarily transparent,
thorough, and consultative rulemaking process, far exceeding the applicable legal
requirements. The process has really been underway for years. Since the release of the 2010
rule proposal, the DOL has continuously been receiving and considering input about a
possible revised rule.

Officially, in April, the DOL established an initial comment period for the current
proposal of 75 days, a reasonable time frame by any measure. Nevertheless, at the urging of
industry opponents, the DOL agreed to extend the comment period for an additional 15 days.
It also scheduled four full days of hearings on the proposal, providing a large and diverse set
of stakeholders an opportunity to share their views in person with the DOL and engage in a
dialogue about the proposed rule. The DOL then extended the comment period yet again.
The record will thus have been open, in effect, for at least 163 days, from April 14, 2015 until
September 24, 2015.

In addition, before and after issuance of the proposal, the Secretary of Labor, his
Assistant Secretary of Labor, and their professional staff members all participated in
innumerable meetings, conversations, events, and media interactions, to gather additional
input from all points of view and, when appropriate, to share their thinking about the
contours of a possible rule. The vast majority of meetings on the proposed rule have been
with industry advocates. Remarkably, this comes after years of input already on the prior
proposed rule and a possible re-proposal, which the industry explicitly and repeatedly
requested. In light of this exceptionally lengthy and diligent rulemaking process, any
industry insistence on more “process” should be dismissed.

Nevertheless, in a relentless effort to further delay and potentially kill the rulemaking,
industry opponents have recently launched the argument that the DOL must re-propose the
rule. This suggestion has no basis in fact or law, and it is nothing more than a bid to restart
the rulemaking process and protract it for months, if not years.

The argument is clearly premature and in any case wholly unrealistic. The legal test
for whether re-proposal of a rule is required focuses on whether the final rule was a “logical
outgrowth” of the proposal and the comments received. The formulations of this standard
vary, but in the D.C. Circuit, a final rule qualifies as a logical outgrowth of the proposed rule
“if interested parties ‘should have anticipated’ that the change was possible, and thus
reasonably should have filed their comments on the subject during the notice-and-comment
period.” Ne. Md. Waste Disposal Auth. V. EPA, 358 F.3d 936, 952 (D.C. Cir. 2004) (internal
citations omitted). By contrast, a final rule fails the logical outgrowth test (and thus violates

should be subject to a fiduciary standard, and while the DOL and the SEC are separate agencies, they have
nevertheless consulted extensively during the DOL rulemaking process and will continue to do so.

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Office of Regulations and Interpretations
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(4) On a web page, “freely accessible to the public,” all compensation payable to the
adviser for each investment it sells, the source of such compensation, and how it
varies among assets.

These disclosures were designed largely for the immediate benefit of individual
investors, and they are important because they help investors understand an adviser’s
recommendations, all of the costs they will pay for the investments, and the conflicts of
interest that underlie the recommendations. Armed with such information, investors are
better equipped to understand whether their adviser is really serving their best interest.

The web-based disclosures will result in a broader, public dissemination of
information, and over time, they will effectuate positive structural changes in the entire
advisory industry. That information can be more widely assimilated and analyzed by
investment professionals, investor advocates, journalists, and others. This huge increase in
transparency regarding industry pricing and compensation practices will result in more
robust and fair price competition for the benefit of all investors. The prospect of this reform
is undoubtedly driving the industry’s ferocious opposition to the rule, because it limits their
ability to conceal and inflate their fees and profits. However, it is one of the most important
innovations in the rule and it should be retained in the final version.

C. An additional exemption for so-called sophisticated investors would open a large
and dangerous loophole.

Critics of the proposed rule have also argued for a sophisticated investor exemption.
This step would be unwise for a host of reasons, and if incorporated into the final rule, would
inevitably result in an “open season” on countless investors who will lose the protections of
the fiduciary duty.

The proposed rule already creates a seller's exemption that may itself prove to be a
dangerous loophole. Fortunately, the DOL limited the scope of that exemption to large plans,
making it unavailable to small plans or individual retail investors regardless of their net
worth or sophistication. As articulated in the release, the rationale for that limitation is that

“Most retail investors and many small plan sponsors are not financial experts,
are unaware of the magnitude of and impact of conflicts of interest, and are
unable effectively to assess the quality of the advice they receive.”>

The release also explained that disclaimers intended to alert investors that they are
not receiving objective advice are ineffective, and may even exacerbate investor
vulnerability.®

These observations are true for the vast majority of investors. Attempting to
differentiate the very few genuinely sophisticated investors from this large group is the
wrong approach. First, of course, the concept has no legal basis in ERISA. The statute does

5 Release at 21,942.
6 Id.

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Office of Regulations and Interpretations
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need advice—unconflicted advice—about how best to invest it so that they have some hope
of a decent retirement. Brokerage firms and insurance companies will never voluntarily
walk away from the opportunity to earn even a modest share of such an enormous amount
of money. Once they are forced to comply with the higher fiduciary standard, they will, with
relative ease, adjust their compliance systems and dispense advice to retirement savers of
all types at affordable rates in accordance with the best interest standard. As discussed
below, this is precisely what thousands of advisers already do.

C. Even if brokers and other advisers ri mply with the rule, a v: ind
growing population of advisers will serve the needs of all retirement savers in full
compliance with the rule.

If any brokerage firms and insurance agencies really do withdraw their retirement
investment “advice” because they claim they cannot or will not comply with the DOL best
interest rule, then that will have little if any impact on those saving for retirement. Even
under this implausible scenario, the rule would never create an advice gap because savers at
all income levels will have ready access to a wide variety of affordable advisory services
under the fiduciary standard. Industry opponents have attempted to portray the world of
fiduciary advisers as small, high-priced, and available only to affluent retirement savers with
a significant stockpile of assets. That is not the reality: Today’s financial marketplace
includes thousands of investment advisers, financial planners, and innovative new
companies who already offer fiduciary advice to investors and retirement savers at all
income levels under affordable fee structures.

For example, a vast number of investment advisers are registered with the SEC and
state securities regulators under the Investment Advisers Act of 1940, and they are bound
by the fiduciary duty when they give investment advice about securities. This already large
and well-established group of advisers is growing. A recent report from the Investment
Adviser Association (IAA) and National Regulatory Services (NRS) found that, in the last year,
SEC-registered firms grew by 5.3%, to 11,473 firms.2@ The universe of smaller, state-
registered IA firms is even larger, totaling 17,782. And the number of individual
representatives of IA firms comes to 325,000.

The report shows these advisers are also serving more clients. Over the past year, the
number of advisory clients being served by investment advisers bound by the fiduciary duty
increased by almost two million, reaching a total of more than 29.7 million clients
nationwide.?? Assets managed by investment advisers required to put their clients’ best
interests first now total $66.7 trillion, representing an 8.1 percent increase over 2014.24 The

22 A Profile of the Investment Adviser Profession, Investment Adviser Association and National Regulatory
Services Evolution Revolution Report 1, 3 (2015)
(https://www.investmentadviser.org/eweb/docs/Publications News/EVREV/evolution revolution 20

15.pdf).

23 Id. at 14.

24 Id. at 3.

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Office of Regulations and Interpretations
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higher net worth clients rather than smaller accounts that are not as profitable for the firm.
As one Wall Street recruiter has said, “[i]t is no secret, of course, that full-service securities
firms have been phasing in punitive pricing policies on small accounts.”” "Brokerages have
always used compensation plans to incent behavior.” ® Consider the following examples:

¢ Bank of America Merrill Lynch (BAML) does not pay its advisers to service clients
with less than $250,000.29 Customers whose accounts hold less than $250,000 in
assets are directed to the Merrill’s Edge platform, which uses employees in
centralized call centers and bank branches to provide customer assistance. BAML
made this policy change because it wanted brokers focused on finding and working
with wealthier clients. 1°

¢ UBS does not pay its advisers to service clients with less than $100,000." We adjust
to make sure our compensation plan aligns with our strategies," Jason Chandler, head
of the firm's approximately 7,100 brokers, said in an interview. Chandler’s assertion
suggest that the firm create compensation incentives that are in the firm’s best
interests, rather than customers’. The firm also provides a bonus to encourage
brokers to serve wealthier households with at least $1 million to invest. Chandler’s
reasoning for the new bonus program was that, “We had too many advisers focused
on households with lower levels than we wanted." 11

¢ Morgan Stanley Smith Barney also imposes a $100,000 minimum account size on
which the company's advisers can get paid a fee.!2 MSSB also charges quarterly fees
of $50 on “Low Balance Households”-- those with total accounts under $25,000.13

im Jed Horowitz, MSSB Hits Small Accounts With New Fees, Reuters (Apr. 18, 2010, 12:01 AM),
http://www.investmentnews.com/article/20100418/REG/304189983/mssb-hits-small-accounts-with-
new-fees (quoting Wall Street recruiter Mindy Diamond, of Diamond Consultants).

8 Mary Thompson, Morgan Stanley's New Broker Plan Takes Aim At Its Wealthy Clients, CNBC (Dec. 7, 2012,

10:37 AM), http://www.cnbe.com/id/100290083 (quoting Wall Street recruiter Mindy Diamond, of
Diamond Consultants).

a Jed Horowitz, Merrill Lynch Pivots to Mildly Affluent Clients, Reuters Gun. 18, 2015, 6:06 PM),
H 2015/06/01 i

idUSKBNOOO2IH2015 608.

10 Michael Wursthorn, aig Lynch's Brokers Want An Edge, Wall St. J. (May 5, 2015, 9:27 AM),
http: R

11 Jed Horowitz, UBS Gives Brokers Higher Expense Accounts To Lure the Wealthy, cnicaae Tribune (Dec. 13,
2013),http://articles.chicagotribune.
accounts-br‘ oke: 's-households.

12 Lauren Tara Lacapra and Jennifer Hoyt Cummings, Morgan Stanley Shifts Broker Bonuses To Reward

Growth, Reuters (Dec. 6, 2012), http://www.reuters.com/article/2012/12/07/us-morgan-stanley-
ce ensation-i FD20121207.

13 Morgan Stanley Account and Service Fees (Sep. 24, 2015), https://www.m: .com/wealth-
relationshipwithms/pdfs/account and service fees.pdf.

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Office of Regulations and Interpretations
Page 6

not say or suggest that retirement savers should receive different levels of protection
depending on their degree of sophistication or their net worth and their ability to absorb
losses from conflicted advice.

Second, there is a growing recognition that the very notion of the sophisticated
investor is a myth. Put another way, while there may be some small number of individuals
who have the knowledge to fend for themselves in the retirement marketplace and the
financial wherewithal to absorb losses, it is impossible to know who they are. Net worth, no
matter how high, is certainly not a reliable measure of financial sophistication. And with
respect to absorption of losses, the net worth thresholds typically suggested for such an
exemption are far too low to identify investors who are truly capable of sustaining significant
losses without suffering a material change in their prospects for a secure retirement.

Finally, there is simply no convincing reason or rationale for such an exemption.
Stripping away fiduciary protections—even if they may be unnecessary for a handful of truly
sophisticated investors—certainly does not confer any benefit upon those sophisticated
investors. The notion, for example, that sophisticated investors really need advice about
riskier asset classes under the BIC is nonsense. Any truly sophisticated investor who wants
to invest their retirement funds in a broader range of assets can easily seek them out and
procure them, regardless of the reasonable restrictions on permissible investments under
the BIC. And sparing advisory firms some marginal amount of compliance cost cannot
possibly justify the exemption.

In fact, all that a sophisticated investor exemption would do is expose countless
investors improperly categorized as “sophisticated” to the predations of advisers who do not
want to be held to the fiduciary standard. The idea should be rejected.

I. SMALL SAVERS WILL NOT LOSE ACCESS TO VALUABLE ADVICE.

Industry continues to rely on myths and scare tactics to attack the rule. One of their
core arguments is that the rule would actually harm small savers by depriving them of the
access to advice they supposedly enjoy now. This is a disingenuous and cynical rhetorical
strategy, divorced from reality and designed to stir opposition among politicians and an
understandably confused public that struggles to make sense out of the bewildering world
of financial advice. It is simply wrong on every level.

A. Brokerage firms do not serve small savers now, so it is disingenuous for them to
claim that the rule would force them to abandon those clients.

Brokerage firms do not provide genuine investment advice to any clients, rich or
poor. What they actually do is make sales pitches to push investment products that pay
them the most in hidden commissions and fees, all in the guise of helpful, objective advice.

But even assuming that these firms actually do provide bona fide advice to their
clients at least some of the time, they certainly aren’t interested in providing it to those
savers who have modest retirement account balances. In fact, many of the larger brokerage
firms have adopted firm-wide policies designed to encourage their sales force to focus on

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Office of Regulations and Interpretations
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Recently, critics of the 2010 Dodd-Frank Act reforms relentlessly pursued the same
tactics, yet their “sky is falling” predictions have proven equally baseless. For example, the
mortgage lending industry fiercely opposed new mortgage underwriting standards to be
administered by the Consumer Financial Protection Bureau. In messaging that is strikingly
similar to what brokers are saying about the DOL proposal, the lending industry hysterically
predicted that the new rules would “cripple credit availability and spur banks, credit unions,
and mortgage lenders to quit the business entirely.”18 However, the most recent data shows
that this simply has not happened, and that in fact, lending activity has increased.!9 The
lesson to be learned from this history is that when faced with new regulations, members of
the regulated industry routinely argue that the costs and burdens are too heavy—but then
they invariably adapt and thrive.

Opponents of the DOL rule are following this familiar pattern, and their attempts to
defeat or weaken the rule must be similarly discounted.2° This is particularly true in light of
the enormous amount of money at stake. Between defined contribution plans such as
401(k)s, and IRAs, Americans collectively have managed to save over $14 trillion,21 and they

provisions of Glass-Steagall Bill as unsound, unscientific, unjust and dangerous. Overwhelmingly, opinion
of experienced bankers is emphatically opposed to deposit guarantee which compels strong and well-
managed banks to pay losses of the weak... The guarantee of bank deposits has been tried in a number of
states and resulted invariably in confusion and disaster . ..and would drive the stronger banks from the
Federal Reserve System.”) (quoting Francis H. Sisson, president of the American Bankers Association).

18 John Heltman, Mortgage Rules Not Chilling Market as Feared, Data Shows, American Banker (Sep. 24,
2015), http: IF ill
feared-data-shows- 1076899- LJ om (emphasis added).

9 Id.

20 Bradley Keoun & Jonathan D. Salant, Obama Plan Gets Wary Reception from Banks, Lawmakers (Update1),
BLOOMBERG (June 18, 2009),
berg.com/apps/news?pid=20601087&sid=ae85nCexFOv0 (“The brewing legislative
battle recalls the industry's reluctance to accept reforms after the 1929 stock-market crash. I don’t think
anyone can buy the argument that by regulating too tightly, we'll choke off capitalism. .. That argument is
as shallow now as it was then.”) (citing Charles Geisst, Professor, Manhattan College); see also Fowler
West, former CFTC Commissioner, Comment Letter No. 32607 to CFTC for Proposed Rule 76 Ee 4752,
Mar. 25, 2011, http:
(urging CFTC to act despite industry ‘objection and recalling that when the CFTC mandated traders on
futures exchanges to time their trades to the nearest minute, rather than half hour, “the largest of the
exchanges, as a part of its campaign to thwart our effort, created large buttons for their employees to wear
that read: ‘Endangered Species—Ask the CFTC.”"). Those seeking to block reform are not only
exaggerating the impact of regulation, but also submitting incomplete, misleading, or inaccurate cost
estimates. See, e.g., John E. Parsons & Antonio S. Mello, Nera Doubles Down, BETTING AGAINST THE BUSINESS,
Mar. 19, 2012, http: tt iness.com/2012, 19/nera-t les-down/ (challenging industry
estimates of the cost of margin requirements in derivatives transactions).

21 Retirement Assets Total $24.8 Trillion in Second Quarter 2015, Investment Company Institute (Sep. 24,

2015), https://www.iciorg/research/stats/retirement/ret 15 q2

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BETTER
MARKETS

September 24, 2015

Office of Regulations and Interpretations
Employee Benefits Security Administration
Attn: Conflict of Interest Rule

Room N-5655

U.S. Department of Labor

200 Constitution Avenue N.W.
Washington, D.C. 20210

Re: Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement Investment
Advice (DOL RIN 1210—AB32)

Dear Sir or Madam:

Better Markets! appreciates the opportunity to submit further comment on the
above-captioned Proposed Rule (“Proposed Rule” or “proposal”) published by the
Department of Labor (“DOL” or “Department” in the Federal Register on April 20, 2015, over
five months ago. The proposal will update the DOL’s 40-year rule that defines when a person
is providing investment advice and is therefore assuming fiduciary status under the
Employee Retirement Income Security Act (“ERISA” or “the Act”) and under provisions of the
Internal Revenue Code (“Code”).

The DOL has extended the comment period on the Proposed Rule to ensure that all
interested parties have ample opportunity to submit their views in light of the exhaustive,
four-day public hearing that the DOL convened from August 10-13, 2015.

The single most important lesson learned from the hearing is this: No new facts or
arguments were raised in opposition to the rule. Witnesses tried to cast their arguments
against the rule in novel ways, but their testimony was comprised of the same baseless
attacks that were made during the initial comment period and in the years of lobbying the
DOL that preceded the initial comment period and the hearing. None of the testimony

1 Better Markets, Inc. is a nonprofit organization that promotes the public interest in the domestic and
global capital and commodity markets. It advocates for transparency, oversight, and accountability in the
financial markets.

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Office of Regulations and Interpretations
Page 12

and bloated commissions that can easily exceed 5% on a single investment product. In
addition, those higher-priced investments tend to perform relatively poorly. As indicated in
the DOL’s Regulatory Impact Analysis, the cumulative cost of these high fees and subpar
returns is enormous.

The less expensive, better-performing advice provided by these new companies (as
well as the advisers and planners described above) is available to savers at all levels. These
firms have set account minimums that are all below $100,000, typically on the order of
$10,000, and in some cases at or below $500.

The success of all of these advisers—the IAs, planners, and innovators discussed
above—is especially noteworthy because it has evolved on an uneven playing field. These
firms operate under the fiduciary standard, while their competitors at traditional brokerage
firms and insurance agencies are subject only to the suitability standard, or something even
less rigorous. One benefit of the DOL rule is that it would promote fair competition among
all types of advisers, and spur the development of fiduciary advice for all savers under
affordable fee structures.

The existence of these fiduciary advisers highlights two important points. First, it is
clearly possible to provide fiduciary advice to a broad spectrum of clients at affordable rates
and still succeed as an adviser. Thus, once traditional brokers and insurance agents are
uniformly required to adhere to the fiduciary standard under the DOL rule, it will certainly
be possible for them to adapt. Second, if they nonetheless inexplicably refuse to do so, an
abundant supply of fiduciary advice will be available to all of the clients they choose to
abandon.

I, §6T RAL HURDLES BEING THROWN UP BYI RY OPPONENTS
OF THE RULE HAVE NO JUSTIFICATION.

For years, industry opponents and their allies have attacked every facet of the DOL’s
rulemaking. In addition to denying the existence of a problem and challenging the substance
of the rule, they have also faulted the DOL’s rulemaking process. They have even questioned
the DOL’s basic institutional competence to fix its own outdated rule. Yet it is very clear that
only the DOL has the legal authority and expertise to protect retirement savers under ERISA.
Moreover, its rulemaking process has been extraordinarily thorough, transparent, and
inclusive, leaving no room for any argument that more time or “process” of any sort is needed
to finalize the rule.

A. The SEC has no authority to solve the problems with the DOL rule, and it is years

away from improving its own deficient regulator ndards governing securities
advice within its jurisdiction.

Industry opponents have argued strenuously that the DOL should be forced to
suddenly halt its nearly complete rulemaking and wait until the SEC addresses the gaps in
the standards of loyalty applicable in the limited realm of securities investment advice. This
argument has no basis in the law or reality, and it is being advanced solely to defeat or delay
the DOL’s rule and sow confusion.

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Office of Regulations and Interpretations
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report also shows that the majority of all registered advisers have both high net worth and
non-high net worth individuals as clients.25 While not all of these advisers provide
retirement investment advice under ERISA, many do.

In addition, there is a large universe of financial planners who provide fiduciary
advice to individual savers on a broad range of investment and money management issues.
Many of them are committed to advising clients at affordable rates and without regard to
account size. Just one example is the Garrett Planning Network, described as follows:

The Garrett Planning Network has a nationwide membership of over 300
independent, Fee-Only financial planners providing advice to people from all
walks of life, without minimum account requirements, sales commissions, or
long-terms commitments. Our members proudly embrace their fiduciary
duty, always placing their clients’ best interest first.2¢

In addition, the Financial Planning Coalition represents a broad swath of planners
who serve everyday Americans in need of planning and investment advice. It is a voluntary
coalition comprised of three organizations: The Certified Financial Planner Board of
Standards, the Financial Planning Association, and the National Association of Personal
Financial Advisers (“NAPFA”). The three members of the coalition are dedicated to ensuring
that “Financial planning services are delivered to the public with fiduciary accountability and
transparency, while always serving the client’s best interest.” They also promote a voluntary
credentialing system, embodied in the Certified Financial Planner designation, which helps
planners maintain high professional and ethical standards, including the fiduciary duty. And
NAPFA represents financial advisers who are singularly committed to serving their clients’
best interests strictly on a fee-only basis, so that the conflicts of interest arising from
commission compensation never come into play.

In addition to these established sources of affordable fiduciary advice, a new
generation of advisers has appeared and is growing rapidly. These companies rely on
modern portfolio theory and technology to provide advisory and investment management
services for retirement savers at very low and fully transparent prices. Examples include
Rebalance IRA, Betterment, Wealthfront, and Personal Capital. Even some well-established
Wall Street firms are turning to this approach, exemplified by Schwab Intelligent Portfolios
and Vanguard Personal Adviser. Some rely heavily on internet interaction with clients, while
others emphasize the role of personal advisers in their platforms. In either case, they are
making high-quality, affordable fiduciary advice available to retirement savers.

Their fee structures are low by any measure, all under 1% and typically on the order
of .25% to .50% annually. The cost of this advice is likely to be far lower than the advice
provided under the traditional commission-based model that broker-dealers and insurance
agents are fighting so hard to preserve. That inherently conflicted advice comes with hidden

25 Id. at 7.

26 Garrett Planning Network, http://www.garrettplanningnetwork.com/ (last visited Sep. 24, 2015); see
also XY Planning Network Website, available at http://www.xyplanningnetwork.com/ (last visited Sep. 24,
2015).

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Office of Regulations and Interpretations
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« According to a 2006 FINRA Investor Alert, brokerage customer advisory call centers
are sales-oriented and often characterized by “A client base that may be determined
by account transaction activity, portfolio size or household assets (for example,
household assets of $100,000 or less). 14

These facts demonstrate that the vast majority of brokers cannot honestly claim that
the proposed rule would prevent them from serving retirement savers with modest
accounts, since they do not currently serve those investors with genuine advice, and would
prefer not to serve them at all. Indeed, as the facts show, they actually prevent their
representatives from advising such clients, or they create powerful disincentives that
discourage them from doing so.

B. Industry’s alarmist predictions are thoroughly discredited by Wall Street’s long

hist. f tion to new regulation.

Since the emergence of financial market regulation, the financial services industry has
claimed that new regulatory requirements will have a devastating impact by imposing
unbearable compliance costs. Yet Wall Street has always absorbed the cost of those new
regulations and has consistently remained one of the most profitable sectors in our economy.
For example, a century ago, when securities regulation first emerged at the state level, Wall
Street railed against it as an “unwarranted” and “revolutionary” attack upon legitimate
business that would cause nothing but harm.!5 However, in the years following this early
appearance of financial regulation, banks and their profits grew handsomely.1¢

Subsequently, when the federal securities laws were adopted, Wall Street staunchly
opposed them, claiming that they would slow economic recovery by impeding the capital
formation process and discouraging the issuance of new securities. In fact, in the years after
the enactment of the federal securities laws, the nation’s securities markets flourished and
became what has often been described as the envy of the world. The same pattern has been
repeated with each new effort to strengthen financial regulation, including deposit
insurance, the Glass-Steagall Act, mutual fund reform, the national market initiatives of the
mid-1970s,!” and virtually every other financial regulation no matter how modest and
sensible.

- FINRA Investor Alert Sep. mn 2015), http: ra.org/investors/alerts er-advisory-
fi Il-center#sthash.nUmtht 4

15 See Marcus Baram, The Bankers Who Cried Wolf: Wall Street's History of Hyperbole About Regulation, THE
HUFFINGTON Post (Jun. 21, 2011, 6:56 PM), http: -huffingtonpost.com/2! 6, Il-street-

historyhyperbole-regulation _n_881775.html.

16 Paul G. Mahoney, The Origins of the Blue-Sky Laws: A Test of Competing Hypotheses, 46 J.L. & ECON. 229, 249
(2003) (“In the 5 years following adoption of a merit review statute [the most stringent type of blue sky
law statute], bank profits increased on average by nearly 5 percentage points ...”).

17 Marcus Baram, supra note 82; see also Nicholas Economides et al., The Political Economy of Branching

Restrictions and Deposit Insurance: A Model of Monopolistic Competition Among Small and Large Banks, 39
J. L. & ECON, 667, 698 (1996) (“The American Bankers Association fights to the last ditch deposit guarantee

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Office of Regulations and Interpretations
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Thus, in designing the BIC, the DOL has broad leeway to incorporate whatever
conditions it deems necessary and appropriate to meet these standards and protect the
interests of plans, plan participants, and beneficiaries.*

With respect to the disclosure obligations, the DOL has proposed requirements in the
BIC exemption that are effective but also reasonable in terms of content, timing, and format.
Occupying less than a single page of the Federal Register release, they amount to the
following:

(1) In the BIC contract, disclosure of the adviser’s “material conflicts of interest,”
along with information about where the investor can obtain details about fees,
proprietary products, and third party payments;

(2) At the point of sale, disclosure of the total cost of each recommended investment
over three time periods;

(3) On an annual basis, a recap of the assets sold to the investor, the fees and
expenses, and third party payments; and

4 Under ERISA, exemptions are also conditioned on a DOL finding that they are “administratively feasible.”
29 U.S.C. § 1108. Critics of the conflict of interest rule have claimed that the rule and any exemptions
must be “workable” or “administratively feasible” from the standpoint of the industry to pass legal
muster. But this critique is based on a fundamental misinterpretation of ERISA. The phrase
“administratively feasible” refers to the agency's capacity to administer the rule, not an industry
assessment of whether the rule is too burdensome, costly, or otherwise “unworkable.” This follows
primarily from the structure of Section 1108. Two of the three criteria for exemptions set forth in Section
1108 relate to the protection of plans and their participants and beneficiaries. It would be anomalous to
read the third prong—“administratively feasible’—as a sudden expression of Congressional concern
about the burdens the rule might impose on the regulated industry. Such a reading would violate the
canon of statutory construction providing that statutory provisions must be interpreted in a manner
consistent with the structure of the statute. See Eli Lilly & Co. v. Medtronic, Inc., 496 U.S. 661, 668-69
(1990); Gwaltney of Smithfield, Ltd. v. Chesapeake Bay Found., 484 U.S. 49, 59 (1987). It would further
offend “[t]he commonsense canon of noscitur a sociis, which counsels that a word is given more precise
content by the neighboring words with which it is associated. United States v. Williams, 553 U.S. 285, 294
(2008). “The rule of noscitur a sociis is intended to prevent ascribing to one word a meaning so expansive
that it conflicts with other terms of the provision in a manner that gives unintended breadth to the Acts
of Congress.” Dolan v. United States Postal Serv., 546 U.S. 481, 495 (2007) (internal citations omitted). In
addition, it would create a de facto industry veto power over agency action they deem to be too
onerous. Although ERISA’s “administratively feasible” language has not been subject to judicial
interpretation, scholarly commentary and government publications endorse the foregoing
interpretation.. See Bill Schmidheiser, ERISA’s Prohibited Transaction Restrictions: Policies and
Problems, 4 J. Corp. L. 377, 405 (1978) (citing [1976] 91 PENS. REP> (BNA) A-4) (“‘Administratively
feasible’ means feasible for the Departments to administer, given the Departments’ resources and the
nature of the transaction sought to be exempted.”); see also FDIC Trust Examination Manual, Appendix E,
Employee Benefit Law (using the phrase “administratively feasible” in the context of the Department of
Labor’s resource allocation decisions).

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the APA’s notice requirement) when “interested parties would have had to ‘divine the
agency's unspoken thoughts,’ because the final rule was surprisingly distant from the
proposed rule.” Int’l Union, United Mine Workers of Am. V. Mine Safety & Health Admin., 407
F.3d 1250, 1259-60 (D.C. Cir. 2005) (internal citations omitted); see also NRDC v. Thomas,
838 F.2d 1224, 1242 (D.C. Cir. 1988) (a final rule is considered the “logical outgrowth” of the
proposed rule if at least the ‘germ’ of the outcome is found in the original proposal.”).

Clearly then, whether a re-proposal is necessary depends on how the final rule
envisioned by the DOL compares with the proposal that was issued for comment, and the
law allows for very substantial evolution in a proposal as it takes final form. Here, of course,
the DOL has not yet decided on what if any changes it will make as it finalizes the proposed
rule, and industry opponents are in no position to insist on a re-proposal at this stage.

To circumvent this conclusive obstacle, advocates for re-proposal have set up a false
premise. They contend that the DOL is already obligated to make major changes in the rule,
to accommodate the wishes of industry commenters who have insisted that the rule is
“unworkable” in its current form. 28 Based on this fabricated assumption, they say that a re-
proposal is already clearly necessary, even before the process has concluded.

However, neither the DOL nor any other agency is required to accommodate the
preferences of the regulated industry that will be subject to its rules. While the DOL may be
duty-bound to consider the comments it receives from industry, it retains the power and
authority to implement the statutory regime as it sees fit, absent an abuse of discretion.
Under ERISA, the DOL’s ultimate obligation is to protect Americans saving for retirement,
not those in the financial services industry seeking to preserve the status quo and maximize
their profits. In light of this mission, it is exceedingly unlikely that the DOL will adopt the
dramatic alterations in the rule sought by industry. In short, no re-proposal is or will be
necessary.

28 This argument is apparently based in part on the ERISA requirement that exemptions must be
“administratively feasible.” But as explained in footnote 4 above, any attempt to read this phrase as a
requirement that all rule provisions be “workable” to the satisfaction of industry cannot succeed. In fact,
the language simply means that any exemptions must be “feasible for the Departments to administer,
given the Departments’ resources and the nature of the transaction sought to be exempted.” See footnote
4 supra (quoting Schmidheiser) (emphasis added).

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A. The core provisions of the rule must remain intact.

The DOL must above all preserve the key provisions in its proposal that address the
most significant defects in the current, 40-year old rule. These include measures that—

¢ Close the loopholes in the old rule, including the “regular basis” loophole and the
“mutual understanding/primary basis” loophole;

e Extend the fiduciary protections to advice relating to rollovers and IRA accounts;

e Establish a remedy under the Best Interest Contract exemption, allowing
investors injured by a breach of the exemption to seek redress for breach of

contract.
B. The disclosure requirements under the BIC are appropriate and necessary, and
hi be scaled back.

Industry opponents have criticized the disclosure requirements under the BIC. The
BIC was a very generous accommodation to the industry’s relentless demands to preserve
their commission-based business model, and it allows advisers to continue charging
commissions and other forms of inherently conflicted compensation, subject to certain
conditions. Among those conditions are various disclosures, and all of them are necessary
and appropriate.

In reality, industry’s opposition to those requirements is based not on the alleged
compliance burdens they would impose, but on the impact of real transparency: With these
disclosures, coupled with the fiduciary duty, firms will no longer be able to gouge their
clients with hidden commissions and fees, and the influence of third party payments on
investment recommendations will be exposed. The DOL should resist calls to dilute the
disclosure requirements.

Asa threshold matter, those disclosure requirements fall well within the scope of the
DOL’s legal authority. ERISA grants the DOL wide discretion in determining whether to
grant exemptions and how to fashion them. The statute also conditions the grant of any
exemption on a set of overarching principles. Among them is that the exemption must be

e “in the interests of the plan and of its participants and beneficiaries,” and

¢ “protective of the rights of participants and beneficiaries of such plan.”

4 29US.C.§ 1108(a).

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delivered at the hearing, and none of the comments submitted to the DOL, have altered the
following basic facts:

e Retirement savers are suffering huge and unjustifiable losses as a result of the
conflicts of interest that are pervasive among advisers. Some estimates place the
damage as high as high as $43 billion a year, and it is probably much higher.

e The DOL’s proposal is a well-designed solution to this problem, one that re-
establishes the essential investor protections Congress intended under ERISA, while
generously (if in some respects unwisely) accommodating many of the industry’s
objections, including their foremost desire to preserve their business models.

e The industry’s relentless attacks on the rule are disingenuous and meritless. They
are based on misleading distortions about what the rule actually requires, coupled
with unsupported and dire predictions about the impact of the rule.

e¢ The DOL has followed an extraordinarily open, lengthy, and inclusive rulemaking
process, one that goes well beyond the requirements of the Administrative
Procedures Act. It should finalize its proposal without delay so that all Americans
saving for retirement can begin receiving the protections they expect and deserve as
they struggle to save for a retirement with dignity and security.

In this supplemental comment letter, we address a number of specific issues relating
to the substance of the rule proposal; we revisit some of the industry’s baseless arguments
against the rule; and we highlight the most glaring flaws in the latest procedural hurdles that
opponents are attempting to raise against the proposal. Our overarching point is that
everything is now in place to finalize the rule without delay once the comment period ends
on September 24. No further accommodations to industry criticisms or counterproposals
are necessary or warranted, and no further procedural steps in the nature of comment
periods, hearings, or re-proposals should stand in the way ofa final rule.

I. THE D NOT DILUTE THE PROPOSED RULE,

The DOL’s proposal is an effective solution to the problem of conflicts of interest
among advisers. At the same time, it makes significant concessions to the financial industry,
and in fact, should be strengthened in some respects.2 Ata minimum, then, as it finalizes the
rule, the DOL must at least not weaken or dilute any aspect of the proposal. The only changes
that could be warranted are minor adjustments that (1) streamline the requirements
without in any way weakening the protections set forth in the rule; or (2) clarify the terms
of the rule, again without in any way weakening its protections.

a Our primary concerns with the proposal were included in our July 21, 2015 comment letter, which we
incorporate by reference as if fully set forth herein.

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The SEC has no legal authority to issue or update any rules implementing ERISA.
Congress gave that responsibility to the DOL, recognizing the unique importance of tax-
advantaged retirement assets and the need to protect them under a separate regime
applying the highest possible standards of loyalty and care.

Furthermore, the SEC lacks any authority to regulate advice about investments that
are not securities. Yet, retirement accounts routinely include a variety of non-securities
investments, including insurance products, real estate, and even commodities. Unlike the
SEC, the DOL has broad authority over all of these assets as well as any “moneys or other
property” of a plan.

Arguments that Congress intended the SEC to lead in setting advisory standards
under ERISA have absolutely no basis. Congress passed the Investment Advisers Act in 1940
to establish a regulatory regime governing those who give investment advice about
securities, not retirement plans. Over the ensuing decades, a vast body of SEC regulations
and judicial decisions evolved under the IAA, a jurisprudence well known to Congress. In
1974, fully aware of the regime it had created for SEC registered investment advisers,
Congress determined that a separate regulatory regime was necessary to ensure that
Americans’ retirement assets were adequately protected from fraud, abuse, and conflicts of
interest. Fueling this initiative was a recognition that retirement assets play a unique and
critical role in determining the quality of life for all Americans once they leave the workforce.
In addition, Congress understood the need to confer special protections for retirement
savings in light of their privileged tax status. ERISA was the result, and DOL has been tasked
with administering it. Congress clearly intended that the SEC and DOL would oversee
distinct sets of rules designed for distinct purposes.

Section 913 of the Dodd-Frank Act only reinforces this conclusion. In Section 913,
Congress gave the SEC explicit authority to raise the standards of conduct applicable to
broker-dealers who give advice about securities investments. Again in recognition of the
two separate roles of the DOL and the SEC, Congress declined in Section 913 to subordinate
or alter the DOL’s authority over retirement assets, or to link it in any way to the SEC’s
oversight of securities, broker dealers, and investment advisers.

As a practical matter, forcing the DOL to wait for the SEC means indefinite delay,
lasting years ata minimum. The SEC is just beginning to decide whether or not it should
even embark on a rulemaking to enhance adviser standards under the securities laws. The
agency is still undecided, even though five years ago, Congress expressly authorized it to act
and the SEC’s own staff strongly recommended that it move forward with a rule. Recent
statements from SEC Chair White confirm these points. For example, ina recent letter to the
Hill, SEC Chair Mary Jo White reiterated that so far, she has simply asked staff to develop
rulemaking recommendations for Commission consideration, thus indicating that her
agency is in the earliest possible stages of deliberation on the issue.2”7 America’s workers and

27 Letter from Mary Jo White, SEC Chair, to Sen. Tim Scott, U.S. Senator (Sep. 18, 2015). Chair White also
repeated other important themes that bear on the DOL’s rulemaking: Those who give investment advice

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CONCLUSION

We again commend the DOL for moving forward with the Proposed Rule. It will
dramatically improve the ability of millions of American workers and retirees to save and
invest for a dignified retirement. We urge you to resist calls for changes in the proposal that
will dilute the protections it offers or open dangerous loopholes for the industry to exploit
at the expense of retirement savers. Americans deserve unconflicted advice; they deserve to
have their best interests put first; and, they deserve a final rule that accomplishes these goals
as soon as possible.

Sincere!

Dennis M. Kelleher
President & CEO

Stephen W. Hall
Securities Specialist

Better Markets, Inc.
1825 K Street, NW
Suite 1080
Washington, DC 20006
(202) 618-6464

dkelleher@bettermarkets.com
www.bettermarkets.com

1825 K Street, NW, Suite 1080, Washington, DC 20006 (1) 202.618-6464 (1) 202.618.6465, bettermarkets.com